Ascential facing e-commerce headwinds

B2B marketing and analytics company Ascential (ASCL) is targeting digital commerce customers. The theory is that companies invested in digital sales during the pandemic and would now need Ascential to help find the right places to advertise and sell their products on the internet.

Digital retail is probably our fate but, in the short term, headwinds are starting to blow for the e-commerce industry as rising inflation eats away at consumers' purchasing power. So far, budget constrictions haven’t affected Ascential too badly with digital commerce revenue growing 15 per cent on an organic basis.

This growth is a little bit surprising given that around 50 per cent of digital commerce revenue is “variable and linked to brands' trading patterns”. Ascential says the outperformance of its customers’ brands relative to the wider sector is “clear” evidence of the benefits it has generated for its customers. It's difficult to assess of this is true, but it’s likely as the recession bites, revenue growth will slow.

Despite impressive top-line growth, the group adjusted cash profit margin fell 2 percentage points to 25.8 per cent. This was due to increased investment in marketing and product development. There was also an extraordinary bad debt charge of £2.6mn.

Although this bad debt is likely just a one-off, the company does have a lot of receivables because it buys media on behalf of its customers, which leaves it potentially exposed to more bad debt charges as we enter a recession. In the last year, trade and receivables increased 63 per cent to £303mn which is more than its half-year revenue. 

Broker Peel Hunt is impressed with the double-digit revenue growth and expects adjusted EPS to rise to 18.2p in 2023 giving a 2023 PE of 16. This isn’t that expensive for a software company, but with recession looming, we think Peel Hunt might be overly optimistic. We move from a buy to hold.   

Last IC View: Buy, 333p, 03 Mar 2022